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Equity quantile upper and lower swaps

Author

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  • Dilip B. Madan
  • Martijn Pistorius

Abstract

With an interest in keeping the cost of carry at acceptable levels for the expression of a positive or negative view on an equity asset over the longer term, a variation to equity default swaps is introduced that fixes the barrier at a given quantile. The barrier level for the stock price then slides upward or downward with respect to maturity depending on whether it has an upper or a lower barrier. The pricing of such sliding barrier swaps is made possible using Markov chain approximations as developed by Mijatović and Pistorius. The pricing and hedging of such swaps is illustrated with respect to a variety of hedging criteria for the variance gamma (VG) and CGMY L�vy processes calibrated to S&P 500 index options. It is envisaged that such securities could be useful in permitting investors to express a long-term view on various economic sectors by writing such Equity Quantile Upper And Lower Swaps, or EQUALS for short.

Suggested Citation

  • Dilip B. Madan & Martijn Pistorius, 2012. "Equity quantile upper and lower swaps," Quantitative Finance, Taylor & Francis Journals, vol. 12(1), pages 29-37, October.
    • Handle: RePEc:taf:quantf:v:12:y:2012:i:1:p:29-37
    DOI: 10.1080/14697688.2011.630327
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    References listed on IDEAS

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    1. Dilip B. Madan & Peter P. Carr & Eric C. Chang, 1998. "The Variance Gamma Process and Option Pricing," Review of Finance, European Finance Association, vol. 2(1), pages 79-105.
    2. Madan, Dilip B & Seneta, Eugene, 1990. "The Variance Gamma (V.G.) Model for Share Market Returns," The Journal of Business, University of Chicago Press, vol. 63(4), pages 511-524, October.
    3. Breeden, Douglas T & Litzenberger, Robert H, 1978. "Prices of State-contingent Claims Implicit in Option Prices," The Journal of Business, University of Chicago Press, vol. 51(4), pages 621-651, October.
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